francine: this nonsense. north korea says it has successfully launched an intercontinental missile. world leaders meet at the g-20 few days from now. the focus on central banks continues. and searching for a shared solution. the u.k. chancellor urges business leaders to help the government make the case. this is bloomberg "surveillance ." we're looking at all sides of

4:01 am

the spectrum. we look at asset classes and gold and yen and, looking, of course, the geopolitics. in the meantime, this is what the data is telling us. a reminder for all of you americans, it is independence day. the markets in the u.s. are closed, which means we are seeing a little bit thin trading, a selloff in risky assets globally as north korea claimed a successful intercontinental missile launch. havens both advancing. you can see the vix a touch up at 11.22. we will have plenty more on the markets but let's get to the first word news. nejra: speaking of risky assets, oil has halted gains after the longest winning streak after rude shows that opec's c production rose to its highest level in june. the increase came from

4:02 am

libya and nigeria which are exempt from making cuts under the deal agreed between opec and its allies. janet yellen was hospitalized over the weekend and luncheon for treatment of a minor infection and is heading home. yellen was admitted on friday and released yesterday from the king edward vii hospital and is returning to washington and expressed to resume her schedule as planned this week. nasdaqrica, some mastec have been distributed after wall street closed early. the exchange operator was conducting a test that led to some providers, including bloomberg lp, showing exaggerating moves in shares, including apple and microsoft that never occurred. it's working with providers to resolve the issue. chancellor has told business leaders they must help the government make the case to europe for a smooth brexit. hammond also said

4:03 am

britain must hold its nerve and key public spending under control, even if members of the government signal that austerity politics may be coming to an end. global news 24 hours a day powered by 2700 journalists and analysts in 120 countries. this is bloomberg. u so much.thank yo donald trump has turned up the heat on beijing after north korea's latest missile launch. successfully fired an intercontinental ballistic missile bringing it closer to building a device capable of hitting the u.s. with a nuclear warhead. trump responded by sweeting perhaps china will put a heavy move on north korea and end this nonsense. all of this comes ahead of this week's summit. let's get more from our seoul bureau chief. guest have two esteemed s also joining us.

4:04 am

first, what do we know about this launch? was far more significant than earlier thought. the missile launch this morning, the u.s. and south korean officials thought it was an intermediate ballistic missile. later on the corrected it and said they migh thought it might have been an icbm. and later on, an hour and a half ago, north korea had a televised announcement, a major announcement saying that, or claims they had actually launched a newly developed intercontinental ballistic missile, which is a significant announcement that both south korea and the u.s. are trying to confirm at this point. there is a press conference going on right now at the blue house. and we will know more at that time. francine: ok, very quickly, and that i want to go to john, how

4:05 am

is the media treating on the ground? do people believe it? so.r: yes, here i think mainly because a north korean announcement correlates to what the military officials saw. they did later correct the apogee, or the height of the missile, which seemed higher than originally thought. initially it was 2300 kilometers, 1400 miles up. that it said it was more than that. then they said it was 2800 kilometers. if it was in a regular trajectory, this is a missile that could reach at least parts of alaska, not the main man. but as significant step towards developing a missile that could reach the continental u.s. francine: john, how much, first, fantastic coverage on bloomberg, all social media and ofomberg.com, but how much

4:06 am

the coverage will be trying to ascertain whether this connection we reach the u.s., or is it something the u.s. government is working on? japanese andean, u.s. officials are working on it. it seems reasonable to assume if this test -- it does seem like this test was a significant test. and it seems reasonable to assume that if it did -- it got pretty close. now, we are a long way away. it seems like we are a long way with from north korea being able to hit the lower 48 states are even hawaii, but nevertheless, it is very symbolic, jluly the fourth. there is clearly a message to america, and the messages we, the north koreans, are making significant advances and we are not going to stop. francine: the message from donald trump was basically to china to intervene here. john: they will be meeting this week in hamburg. the risk there is that the

4:07 am

temperature rises on that meeting. and of the endless him talking to saying that the u.s. and china need to make sure their relationship, the u.s.-chinese relationship, is not being dictated by the north koreans. certainly they have a huge potential, certainly donald inmp in his tweets and public statements is getting quite uppity, probably not the right word, but certainly irate about this, and you can see the tone -- getting more and more annoyed about what he sees as their ability to rein in the north koreans. thecine: but then, chinese do not react well to those kinds of tweets. john: they do not like being pushed into a corner, it's true. need to bericans very careful about how they approach this, how they approach xi. trump has been going on and on about this for a long time. xi, his temptation will be to

4:08 am

turn around and say, i get it. don't push me around on this. the choreography is important, but it is also important to bear in mind that china is stepping up onto the world stage and trade on climate change. cannot resent itself is a world leader when it has got a renegade nuclear rogue state in its backyard. francine: i want to talk about markets by president xi is also meeting with vladimir putin. will they discuss north korea and trump? john: they will be talking about it for sure. francine: let's bring and derek halpenny. and our guest from j.p. morgan chase. this is a significant development but also traders are now starting to take note. >> yes. if you look back historically at these events, dollar-yen

4:09 am

tends to drop. wherepretty much back to it was and everybody forgets about it and moves on. as we have been hearing, this looks like it is something a lot more significant. and there is, therefore, a much greater risk the markets will pay more attention to this and it could have legs in terms of bringing some risk aversion to the markets. aversion that could actually stay, that could last? a newfound trend were markets have to sit up and take notice or what will it be a short-lived event? seen we get a knee-jerk reaction and then the dust settles and people come down and look at the bigger fundamental on the global back-check. john, it isrom independence day, it is light trading. all of that needs to be taken into account. francine: what will be the main message of g=-20? >> this was going to be a very

4:10 am

fractious g-20. deep divisions over tray. reports that trump will begin looking at a trade war and climate change continues to be a thorn in the side of everybody. of disagreement. but it is just possible that this missile test coming on the eve of the g-20 could actually unite the g-20, and we could see a much more common purpose. on this particular issue, then we have -- on climate change and on trade. again, we come back to the big sticking point. what is china going to do about it? francine: again, do we see yen rallying on the back of every little blitp like this? or is there a trend -- >> because this looks more serious, it is different. we are movingis, towards something has to be done about this. whereas in the past, the

4:11 am

financial markets have taken the view, another missile from north korea. it is a bit of an irrelevance on the global stage. but now with the ante upped on this missile launch, markets will pay attention to something that has to be done. the question is what is that? >> i would not understate the this.ism of the very fact that today north korea, on independence day, can potentially hit mainland america with a missile, for any american president that is a big deal. their conclusion will be, i do not care what happens -- [ indiscernible] francine: we will be back with our guests. let's get to the bloomberg business flash. santander says his deal to take over failing banco popular will have a minimal effect on earnings. and expects to report a profit of 3.6 billion euros. it set the sites of its 7

4:12 am

billion capital raising says it will sell 1.46 billion shares. four former barclays executives have told a london court they will plead not guilty to charges they conspired to commit fraud over a 2008 fundraising with qatar. the former ceo and roger jenkins -- and two others are the most senior executives facing criminal charges since the financial crisis. the case relates to loans barclays made available to qatar in a deal that race 12 billion pounds. the head of the italian bankers association told bloomberg the liquidation of two banks was a turning point. sabatini also discuss consolidation among its lead ba nks. >> by the end of this year, we probably end up with less than 140 banking groups active in

4:13 am

italy. so, progress in the consolidation of the sector is already in place. we cannot exclude additional consolidation, but i think that, also, consolidation at the european level could be welcomed. nejra: and that is the bloomberg business flash. francine: we have had great decisions -- rate decisions out of australia and sweden today. in australia as it waits to see if wages were respond. the riksbank became the latest central bank to make a hawkish shift. still with us is derek h alpenny. do you believe that may be central banks gave each other a call and said that we have to be more hawkish. at leaxt st it's repriced.

4:14 am

to sayuld not go so far that there was complete coordination, but there is something in amisss. weather with her was an acknowledgment that people got lulled into a false sense of security. when you look on the world, you're probably still need accommodation but you do not need emergency levels. that is what central banks are trying to take people away from. derek: i think today, based on market expectation, i would say the riksbank did the bare minimum, based on the statement from april. whenve removed the bias you consider what the ecb did on june 8. they replicated that. but the other for guidance and term of the timing of the first rate increase has been left unchanged. year yield jumped up by six or seven basis points. i think the markets were anticipating, at the bare minimum they would do what they

4:15 am

have done. but they did not do anything more than that. in that sense, perhaps the markets will be somewhat disappointed based on the type of rhetoric we were getting last week -- francine: what are you expecting this week? the markets do not believe the fed. what would take for them to believe that fed? it is pure inflation and wage growth? derek: we have dollar bearish forecast over 12 months. ollar bygot 1.20 euro-d the middle of next year but our message is nuanced now. we have had a 6.4% drop in the dxy in first half of this year. that is the worst half calendar your performance for dyx since the second half of 2010. we have a big dollar weakness already priced in. and i think in that sense, we see the dollar kind of stabilizing more in the second half of the year before we see further dollar weakness in the first half of next year. the level of pessimism in relation to the u.s. economy we

4:16 am

think has become overdone. if the data comes out confirming that we have real gdp growth around two percent, that will be enough for the fed to continue on its track that it is-- that should support the dollar. francine: do you agree? >> completely. now it's come to a level where it is a bit more two way. we had first quarter gdp revised spec up. -- back up. the second quarter looks like it is going to be better. surprising, typically the mean's reverting. it does feel like the whole isket thinks that the u.s. not going to do particularly well, and action the risk is that it reaches improving in the second half of the year. i personally do not think friday is about the number. continuing to get good job

4:17 am

growth but we are not getting the wage growth. if you get the final box ticked, that will give the green light to the markets. francine: the psychology from the fed that they're itching to hike because they want to give themselves enough ammunition to deal with the next downturn. derek: i think they want to hike because they have a great opportunity now. down. complete reversal of what tantrum.post taper they now have an opportunity to start to move rates up. again, the economic data just about justify this. we've still got accommodative policy over there. is that wanted? and not think janet yellen the fed think that. they want to stop the asset price inflation and get the two way back into the market. francine: they both stay with us. next, as chancellor philip hammond calls for business leaders to make a case for a smoother brexit, we'll analyze

4:18 am

the more conciliatory language coming from the u.k. government. this is bloomberg. ♪

4:19 am

4:20 am

4:21 am

francine: this is bloomberg "surveillance." for our american viewers, happy fourth of july. the u.k. chancellor philip hammond is calling on business leaders to help the government make the case for a smooth brexit. in a speech at the consideration of british industry, philip hammond said that business concerns will be heard as negotiations get underway. his is a yard being seen as more

4:22 am

evidence may's government is softening its rhetoric on brexit. halpennyh us is derek and ian -- from j.p. morgan chase. are they softening, or we don't know what is going on and we assume they are softening? ian: philip hammond before the election, there was not a peep out of him. we did not hear about brexit from philip hammond. it is very clear he sees the reality of the election results which is essentially parliament, don't have the numbers to go straight on with the strategy they had before the election. is a real there change potentially emergent. towards something -- in terms of transition. we talk about soft, talk about hard. it is all about the transition phse. -- phase. we can certainly move toward

4:23 am

something that is longer what markets are expecting an something where, initially, not much changes. you have dial down this march 2019 date. it was ridiculous in the was been treating. on treaty. it just intensify the negotiations needlessly. we need to remove that cliff edge date in order to get a favorable climate for negotiations. francine: do you believe we need to remove that hard out of march do, do we needwe to do it in the next three months, but at the end of the day, the ceo's -- have to make decisions not? probablyink that would be best. they are going to make forward-looking decisions and they are not going to make a move, they are uncertain about the outcomes. we need to get more clarity and maybe a hard and fast sai the deadline where everything has to , that maythis date

4:24 am

not be the right way to negotiate. that said, the europeans are going to push back hurt and make sure they get their say in the matter. it is not remember about just how britain leaves, but from the european standpoint, what the deal is in the end. francine: back to inflation. depending on what kind of brexit we get, we need to look up there is inflation or not. this goes back to mark carney's conundrum. you look at, if some of the pipeline pressures, there is our the evidence that the impudence from -- it is and -- impetus from fx, input prices have peaked at the beginning of the year and have dropped back. as you look at the strength of , crude oil prices will not have the inflation of the second half of the year. reason to believe he will to start to see some diminishing inflation pressures.

4:25 am

in terms of the bank of england's target, it is likely will be about that target in 20818 but even if we just see the emergence of signs about reversing, i think that is good news. francine: actually, this is something we are seeing a little bit here in the chart. let me talk you through it. this is the u.k. one year inflation swap. we title this, it shows the u.k. inflation expectations are fading from 2017 and that overshadows the retail price pick up. are we worrying too much about inflation? iaian: i have been very surprised of what the bank of and what has been saying. yes, near-term inflation has risen. but it is the wrong sort of inflation and we now have negative real wages in the u.k. and i think the bank of england will look through this and it will definitely be looking through this as they did other times post the financial crisis. they were still doing

4:26 am

quantitative easing, extended it when inflation was above their targets and back in 2011-2012. i will be very surprised because i do think you have to look at the overall economic data. it's starting on the margin to roll over and you have to be concerned about the output and the economic growth in the u.k. and maybe the wrong sort of inflation is not what the bank of and what should be focusing on. francine: we will get back to that. we're now just getting some breaking news for worldpay. world pay has confirmed it has received some preliminary approaches from avan ta and jpmorgan. that was something that was rumored. i'm looking at the world pay share price, gaining 12%. this is bloomberg. ♪

4:27 am

4:28 am

4:29 am

francine: this is bloomberg surveillance. nejra: north korea says it has successfully testfired an intercontinental ballistic

4:30 am

missile, taking it closer to building advice -- and advice to can hit the u.s.. it was a newly developed icbm -- the launch increases tensions in the area. was hospitalized over the weekend in london for treatment of minor infection, but has been discharged and is heading home. she was admitted friday and released yesterday. she is returning to washington and expects to resume her schedule as planned this week and some stocks of the distributed by third party data providers after wall street closed early for the july 4 holiday. the exchange operator was testing this and it provided up shares showed moves in

4:31 am

including apple and microsoft saidnever occurred nasdaq they are working to resolve the issue. philip hammond has told business leaders they must help the government makes a case to your price move brexit. in a speech organized by the confederation of british industry, he said we must hold nerve and keep public spending under control, even if the government says austerity politics may be coming to an end. global news 24 hours a day powered by more than 2600 journalists and analysts in more than 120 countries, this is bloomberg. thank you so much. let's focus on oil and brent clued. the benchmark is lower after the longest rally since 2012 data compiled by bloomberg shows it was the highest out put. with the more executive editor for energy and commodity.

4:32 am

first of all, what does this production mean for the market? >> because we are outside the opec deal, it is against all expectations very high. it is incredibly unhelpful when you think about how the million barrels are coming back in whatever saudi arabia does has this ongoing problem. francine: is there talk about extending production? >> there is lots of talk and no action. we thought when they were meeting last month, we thought that would be on the agenda. cling to the to idea that we will get rebalancing in the second half of the year. others say it's more like the first half of next year. we have not seen demand pickup

4:33 am

in the way we were hoping. there is nothing on the side of the equation that will help. francine: when will stock files returned to normal? >> it depends. estimates range from the first half of the year -- next year, which is a wide timeframe to work with third. they are talking returning to the five-year average. as you get massive oversupply, that average gets higher and higher. francine: this translates into inflation? this is the debate we are having. you get currencies that are commodity related to related. forecast.ese into our these got them finishing the year slightly north of $50 a barrel.

4:34 am

that is obviously marginally positive. when you look at some of these currencies, you've got to look at the play between the terms of trade. obviously, the canadian dollar is on a significant time of the dollar around 130 is where we think it should be based on the dynamic i've just mentioned. what is really driving canada the moment is the expectation that the bank of canada could raise rates. the market has moved that way. dropped dramatically over the last six weeks or so and we are not fully priced, but the market is looking seriously at a rate hike in july. francine: how does it translate

4:35 am

to your world? it's a high-yield bonds in the investment portfolio. what impact that would have to the overall rate there. i think the market there is healthier and we have seen some widening energy spreads. it's nowhere near what we saw in 2000 15. francine: thank you all for joining us. stay with us. integrated payment processor. processes --nar preliminary approaches about the entire company be required. it is now back down. that means it is rising the most since it ipo back in 2015. the takeover deadline is august

4:36 am

1. we will have 20 more on this developing story. this is bloomberg. ♪

4:37 am

4:38 am

francine: this is bloomberg surveillance. mark: that's the blue line in the lower half of the chart. the yellow line is the south korean stock exchange primary benchmark index. we know the news about renewed tension in the korean peninsula. north korea fired and icbm. this is the worst performer as itthe end of may, even

4:39 am

has continued to climb. the upper line is the early warning signal index that judges stress. it's reading about .5. this means that stresses below average. we are it .387. that is fascinating. according to the chinese, the two countries will sign more than 10 pacts worth $10 billion. they will make joint statements on international issues. this chart right here compares russia and of foreign investments from china. of china is investing more. russia is investing in china. crude oil fell after a winning streak. there was an 11% gain. opec production climbed in june.

4:40 am

libya and nigeria pumped more crude. the final chart is on earnings. this is trimming the expectations for corporate earnings. it could be peaking according to j.p. morgan chase. you can see after months of positive revisions that coincide with central banks, they are getting ready to tighten the currency. happy fourth of july. macron has used a speech to country at the new age of enlightenment. he called on parliamentarians to put aside their cynicism and countryrevive french creativitd leadership on the global stage. >> it's up to france to take initiative and i want to do it.

4:41 am

in the months to come, thanks to the close relationship i have established with the term in chancellor, everywhere in europe we will launch democratic conventions to reform europe with its core political project, to unite people. francine: let's get more now. good morning to you. what was he trying to signal with this speech? we don't want to give any details of future reforms. this is something he is leaving to his prime minister. stand on a bold political site. imagets to break with his hethe former president, projectsout humanist and a new revolution to replace

4:42 am

france and give new confidence to the french people. he did make two announcements. they were mostly on the institutional side. he gathered these mps to tell slash thes going to numbers by one third and he was ready to use a referendum if needed to do so. he wants to introduce representation in parliament to have smaller parties, including the national front. the state will lift of emergency that france has been living in since the terrorist attacks in 2015. francine: how unusual was this? >> you have the state of the union every year. in france, this is very unusual.

4:43 am

this type of congress is used to change the constitution or allow a new country to join the eu. sarkozy used it during the financial crisis in 2009. really, this is very unusual. of course, this brought a lot of critics. they decided to boycott the congress. they did not show up. .e called this event compared macron to a televangelist. francine: thank you so much. i am all over the place this morning. happy fourth of july. we should be having barbecue.

4:44 am

how do you think he is trying to do. he has a lot of momentum behind him. will he be able to deliver the reforms? derek: it's a start to tell them a third of them will lose their jobs. that's pretty good. clearly, he has a strong mandate. a lot of what he has been talking about since he became president is quite big picture and long-term vision. i think the markets want to get into the nitty-gritty. some of the difficult reforms that france has a skewed in the past, time will tell. with such a -- such a strong mandate, there is reason to be optimistic that more can be done in terms of difficult reforms. francine: do you give him six months? now, if he't do it fails what will come after him? iain: i think what he's doing is

4:45 am

the right thing. he's got a very strong mandate. he should get this done straightaway. i think we should give him six to nine months. it's going to be very challenging to change the mentality in france into his way of thinking. this is an going to be a quick fight. he's got to work very hard over the next few months to make sure this comes through. i think now is the time to really look forward. you've got the opportunity to really drive through that mandate. francine: does this filter through the european earnings? europe is back. is that the case? derek: i'm not sure it's completely macron. he has helped the situation. it could have been very taken if there were other results in the election. i think there is a tech in

4:46 am

european activity. this is rather that than one --gle election result in result. -- result. the more recent close suggests investor still one more time in order to make a clear columnist. the important thing is going to be how germany and france play together. there were a number of references to working with france. been a while since we had this divergence in a policy between the two key countries in europe area if he can bring a turnaround in that over longer-term, that has to be deemed as positive for investors. francine: what does it mean for the ecb? does it change their forecast. we will have italian elections that may prove the trickiest.

4:47 am

it's difficult for them to look at that. derek: when you look back at the past, they made references to how important it is for uncertainty to play into real gdp. given this message of them being of political uncertainty and how that could play into inflation. wayhave to argue that the politics has gone, you've got to feel more confidence. that should sit with the idea of them communicating to the markets. francine: are they over communicating? do they see more tempered? they have been communicating so much over the last couple of years that they can't stop. that would give the markets a bit of a shot. draghied to find what once from the market and how he

4:48 am

work in hisket to next few moves. we will start to talk about tapering and moving rates higher , they be that is sometime next year. i would expect more and more for us to hear from the ecb. they are very adamant they don't want to take more impact. they want to push the market in the direction they feel most comfortable with, which is smooth from the low bond yield. that could be a challenge for them. francine: it's certainly good. need to offeryou to get some of his more controversial policies through. we will discuss that next. tune into bloomberg tonight at 8:00. willsteel and matt miller

4:49 am

host the boston pops fireworks spectacular. this is bloomberg. ♪

4:50 am

4:51 am

4:52 am

francine: this is bloomberg surveillance. let's get straight to the bloomberg business flash. nejra: the deal to take over the failing bank will have a minimum effect on earnings. expect a profit of 6 billion euros. spain's largest lender will have capital raising. it will sell 1.4 6 billion shares. for our klees executives told the court they will plead not guilty to charges they conspired to mid fraud over 2008 fundraising. they are among the most senior u.k. bank executives to base criminal charges since the financial crisis. it relates to be and loans that

4:53 am

were made available in a deal that raised 12 billion pounds. apple is working on the features that will you unlock the iphone using your face instead of a fingerprint. the company is testing an improved security system that allows users to login or authenticate payments by scanning their face. it is powered by a new 3-d sensor. bloomberg is the/. francine: the japanese prime hurdles may face fresh after his first major election defeat since taking power in 2012. he lost more than half of the seats and wound up with just 23. that could be a harbinger for national elections.

4:54 am

give me a sense of where this goes vested mark you are expecting it higher short-term? given the fireworks in central portugal last week, what interesting is how on interesting the speech was compared to the other central bankers. boj,d a message from the nothing going on here, look elsewhere. there could be some potential for an opening up of these divergence. francine: doesn't any divergence to help his cause? core: based on where the nationwide inflation rate is, there is a long way. downgrade from them in terms of their inflation protection. it could be even further away.

4:55 am

the boj will not be joining this shifting policy stance from the central bank. short-term, there could be a weakness. there is that risk. thecine: where do you see pound is an asset class? iain: when we look at it from a bondholder standpoint, we would argue for lower yields. interesting, you could see the bank of japan going the other way. reduced.ctually it has come down. we are approaching that point on the 10 year. they have looked at the range they want to hold it from. if you have this global could see them

4:56 am

coming in and doing more purchases and they have done recently. that would be a yen weaker. thank you so much for joining us for the hour today. bloomberg surveillance continues in the next hour. we will talk to the former u.k. financial services person. on, we will later be talking to the former chief. we will talk to him about we will talka, about amazon and whole foods, that takeover is a pretty interesting one. ♪ this is bloomberg. ♪ ♪

4:57 am

4:58 am

4:59 am

♪ francine: trump's challenge to china after north korea claims

5:00 am

it successfully launched an intercontinental missile. neutralsticks to its stance. bank'sus on central continues. the u.k. chancellor urges business leaders to help the government make that case for brexit. good morning. this is "bloomberg surveillance ." inm a francine lacqua london. to our american viewers, happy independence day. this is coupled with a little bit of a selloff in risky assets. let's get sure to the bloomberg first word news. here is emma chandra. amaq: north korea may be one step closer towards its goal of building a missile with a nuclear warhead that can hit the u.s. for the firstaims time it has successfully launched in intercontinental ballistic missile. the president tweeted that

5:01 am

perhaps china would end this nonsense. russian president vladimir putin is meeting with chinese president xi jinping. china, trade between russia and china rose 33% the first five months of the year. in the u.k., that chancellor of the exchequer says the government must hold its nerve and key public spending under control. not all members of his party agree. in sweden, inflation has prompted the central bank to remove the potential of another interest rate cut. they will remain at their current level until the middle of next year. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries.

5:02 am

i am emma chandra. this is bloomberg. francine: thank you. onto your markets. seeing a selloff in risky assets. it seems that the selloff touch in the last hour and a half as north korea claimed a successful intercontinental blizzard missile launch. -- intercontinental ballistic missile launch. u.s. markets are closed. hong kong stocks sinking the most since april. there are a little bit of geopolitical tensions filtering through, but on thin volume. it was a first half to remember with markets rocketing pay the dow and s&p 500 posting their best first half gains since 2009. the world central bankers gave traders pointed to discuss with a hawkish tilt, despite a mixed

5:03 am

inflation picture. the pound took a hit after governor mark carney said it was not the time to raise rates, though days later, he seemed to reverse his position, saying policy makers may need to begin hiking. in europe, the ecb president also moved markets. euroomments sent the higher. joining us now, jon moulton, better capital founder. adair turner, former financial services authority chairman. gadflyth us, bloomberg reporter mark gilbert. thank you for joining us on the fourth of july. lord turner, let me start with you. how do you feel about the economy now? the markets want to believe in central banks, but inflation is underpinning everything we do. lord turner: i continue to believe the global economy will continue at a relatively slow

5:04 am

growth pattern overall. my own position is i think rates are still saying a lower for longer than most people realize. i have believed this since 2012. i am boring myself with how many times i have said it. i have been right so far. one of these days, i will be wrong. i think rates will probably go up further in the u.s. i think we are at the end of easing in europe. but most intriguing is there's almost no sign in the advanced economies of any inflationary pressures in any labor market anywhere. we have this extraordinary phenomenon of even when we have very low on implement rates, we just do not get a reaction of average earnings. until you begin to see that, you're not going to see inflation sustainably going through the 2% target. i suspect some of the central banks will decide that, actually, extremely low interest rates did not have all that much

5:05 am

of a beneficial effect on the downside, so they may as well ring them up a little. the strain is being taken by fiscal expansion through the reason why the global economy got going this year was a big fiscal expansion in china and the expectation of a fiscal expansion in the u.s. balance,it will be a but i think the fundamental drivers of a low inflation and relatively low growth economy is structurally there. francine: if we have lower for longer, what are the unintended consequences? does it mean we create lower bubbles then we think? i certainly rank there are more bubbles. low interest rates have one definite drawback, which over time is stacking up. high interest rates mean weak

5:06 am

business models get squeezed out of economies. they do not get squeezed out when rates are very low. over time, you stack up low return, negative return businesses. the result is part of the reduction of productivity growth you are seeing in a lot of economies. the biggest downside is simply this failure to eliminate. darwin is not allowed to operate. francine: at the same time, todarwin, it seems central banks are itching to start moving. why are they not? if you have seen no wage growth, you're not going to see inflation. there is the 10 reputation to normalize -- there is the 10 reputation -- the temptation to normalize. it seems misguided. --ncine: what is no great

5:07 am

what is no wage growth was something structural? which is something we heard from the fed. mark: what we have seen a decade or more of is all of the rewards of global trade have flowed to capital rather than to labor. that does seem to be a structural change. ergo, you have lower for longer interest rates because there is a structural change because you will not see wage inflation, through -- come through. a situationave where we are in cahoots with the central banks and money praising -- money pricing is not happening in markets anymore. because -- t, just qe will always be there for the next recession. francine: but instead of saying trust us, we will raise rates -- lord turner: there is the

5:08 am

assumption of a level of unemployment at which interest rates will raise rates. but we keep lowering what that estimate is. should they raise rates in anticipation that that point exists, or should they wait until that occurs? will raise rates, but they may find they will be under running their inflation targets in two years. the issue is do they have a concept of normalizing, per se. but i suspect we will see the fed go up to 1.5 percent. but in five years time, we may still find. it below that i think short-term policy interest rates are difficult to understand. it is the long-term interest rates that are startling. we still have people in the moneyqueuing up to lend

5:09 am

for 20 year contracts, which the government promises to give you back in 20 years less, in real terms, then you started. that cannot just be central bank policy. that has to be something structural about our policies. beenine: mario draghi has asking about that for six or seven years, so at what point do governments step up? step upernments have to to higher interest rates when fear enters the equation again. it is all very well to sign up for a 20 year contract if you lose 1% of your money, but if you're going to lose 10% or more, you will demand a higher interest rate. you will see some countries blowup with that happening. one day, it will. i think there may be something structural here. larry summers talked about this issue of if there is a

5:10 am

stagnation -- my belief is there may be something fundamental. attempt to save money is overwhelming investment need of some private companies, where the costs of computers and software is collapsing. this is really quite structural. the thing that made me think of that is if you look at u.s. or u.k. real long-term interest rates, maturity linked to a 20 year bond, that did not just calm down in 2008, that fell every five year period from the 1980's down to -1% today. and youut on a chart, will see what looks like a structural change rather than a policy change. francine: i will get that chart for you. ,ord adair turner, jon moulton and mark gilbert state with us. coming up, we also speak with alberto gala. look for that at 6:00 a.m. in new york, 11:00 a.m. in london.

5:11 am

this is bloomberg. ♪

5:12 am

5:13 am

♪ emma: this is "bloomberg surveillance." let's get the bloomberg business flash. microsoft is realizing its sales and marketing operation. will mean thousands of job cuts in areas such as a field sales. microsoft wants to attract more customers to areas like artificial intelligence. student, you may be able to unlock your iphone using your face instead of a fingerprint. apple is test in -- testing and improved security system. it is part of a new iphone expected to release later this

5:14 am

year. rupert murdoch is at a billionds in his $15 bid to buy sky. the british government has already rejected his proposal to guarantor -- guarantee sky news editorial independence. you.ine: thank the u.k. chancellor has told business leaders they must help the government make that case to work on brexit. he said business concerns would be heard as negotiations get underway. the conciliatory tone is seen as evidence may is softening on brexit. with us, jon moulton of better capital. adair turner, the former financial services authority chairman, and our own mark gilbert.

5:15 am

are we going back on brexit? i am still in favor. a few more concessions -- if more concessions were run by cameron, i would be more in the camp. francine: is it softer? "hard"e word "soft" and are really bad words. they are used all over the place. francine: would you be disappointed if we had no deal? jon: no deal is better than a bad deal. francine: would you agree? lord turner: i would not agree. if we get too much first, 2019, and say we have not agreed to anything, that is it, and we are just on wto trade terms, i think that will be a shock to an economy that is already soft. i do not think there will be no deal. i think sanity will prevail. i suspected to be a transitional

5:16 am

deal of some sort, that -- jon: i do not think no deal is desirable, but a bad deal could be worse. lord turner: if it was really, really bad. the sites toidiot check millions as a severance, it would be bad. francine: what exactly is a bad deal? would you go back on some of the red lines that the u.k. wanted to make sure there was still access to the single market? jon: there were a lot of things that i would be happy to cross those lines. interestingises an point. the exit deal, what we have to pay to leave the e.u., remains a stumbling block. >> a political nightmare. mark: that will be the first item of business. michel barnier has said this. unless the u.k. is willing to pay, everything else stops. lord turner: if we had never

5:17 am

gone into the european union in the first place, we would have all sorts of deep cooperation with the european union. we ought to construct those areas of deep cooperation by sectors. bet if we hado never been in the european union, we would have made a special set of arrangements for pharmaceuticals, certifications, testing, joint with europe. we need to work out how we get even deep corporations while we are outside the european union, which we are going to be. there happens to be a 20% chance that the whole thing may never occur, what it is still 80% likely to go ahead. francine: but how? lord turner: i have no idea. is going tow what occur. after all, a set of events have happened in the last year that i did not think would occur.

5:18 am

i had no idea we were going to have this election, i had no idea she was going to lose. anybody who believes exactly where we will be, politically and economically, in five years time is deluding themselves. jon: there is no particular reason we want to be just with europe with form circles. this deserves to be international. getting out of europe gives you the opportunity to do something much better. but it does -- it is an area that needs to get fixed. francine: is is a real headache for what the boe will do to interest rates? mark carney, when he said now is not yet the time, turns around and says actually, it might be. the unreliable boyfriend is back. francine: is he, or is it theresa may now? mark: well, there is not much sound of fiscal easing from philip hammond. internald of a fake,

5:19 am

toward party debate, not really an economic issue. it is a power play. note is much -- there is much sound of the purse strings being loosened. 2%, you wage growth at are seeing negative income affect on the population. i do not think, in that staysnment, and inflation high and wage growth stays low, i do not see there is voting to tighten. and the inflationary report still assumes there is real growth in incomes, which is not what we are seeing. francine: that is one of our other charts. we will look at income real wage growth and how you view economic expansion. breaking news at of al arab via u.a.-arabia, saying the foreign minister is still waiting for a reply from qatar.

5:20 am

there is speculation whether we will get something today. i believe the saudi deadline is today. we are expecting a response from them. jon moulton, better capital founder, loaded tear -- lord adair turner, and mark gilbert still with us. tomorrow, we speak with a deutsche bank chief economist. this is bloomberg. ♪

5:21 am

5:22 am

5:23 am

♪

5:24 am

is "bloomberg surveillance." in london.ne lacqua we are talking about brexit, the future of what the boe can or cannot do. let me bring a over to my charts. itis my favorite chart when comes to the u.k. you see a inflation picking up, wage growth going nowhere. lord turner, will it tell us about the future of consumers and retail in this country? lord turner: something extraordinary has happened to the u.k. and other economies the last 10 years. p per2000 to 2007, gd capita have gone up. since 2007, there has been no growth. gdp per capita over 10 years is up about 2%, which is miniscule over a decade. wages are down. in 2015,is period

5:25 am

2016, at last there was a slight increase in wages. now we are back to them going negative. in terms of the outlook for the economy, it is depressive. that is why i think the bank of england will not respond to the increase in inflation. i think they will see an increase in inflation, and it will come down. the bigger issue is to try to work out why is this structurally happening? a decade of no growth and productivity or real wages? francine: this is similar to what is happening in the u.s. jon: yes. productivity is the core of it. francine: do we need to measure things differently, the strength of the economy differently? jon: there is an argument that says productivity is basically a measurement issue, that we all have a computer in our pockets that there on 24/7

5:26 am

data is not capturing, but it is hard to see how you would start to capture that and how you would factor that into your monetary and fiscal policies going forward. francine: we will discuss this a little more, especially when you look at the fed and their vacations. turner, and adair mark gilbert all stay with us. coming up, we speak with terry leahy, the former tesco chief. we will talk to him about amazon and whole foods as well. this is bloomberg. ♪

5:27 am

5:28 am

5:29 am

♪ francine: this is "bloomberg surveillance." tom keene has been day off. happy fourth of july to him and our u.s. team.

5:30 am

a lot of them are actually working in our new york office. let's get straight to bloomberg first word news. emma: for a long time, north korea has threatened to develop a missile that could hit the u.s. with a nuclear weapon. it may be one step closer. north korea says they have launched an intercontinental ballistic missile. it flew more than 500 miles before landing in the sea of japan. president trump he did perhaps china what "put a heavy move on north korea and end this nonsense once and for all." the justice department wants critics of the travel ban to lead further questions to the supreme court. the state of hawaii is challenging the enforcement of the order. the federal judge asked the judge in honolulu to deny the request for clarification. the ruling could set back of the plan for rolling back anti-pollution rules. the court says the epa can limit

5:31 am

emissions from oil and gas wells, but the rule has to remain in place. in venezuela, the opposition alliance has held an unofficial vote this month. antigovernment protesters have been -- protests have been going on for months. is planning for a constitutional -- global news 24 hours a day, powered by more 2700 journalists and analysts in more than 120 countries. i am emma chandra. this is bloomberg. francine: thank you so much. last week's high-profile failure chain led to concerns and called into question the legitimacy of the e.u. banking. it was for many, a setback to the european union's efforts.

5:32 am

the bank of england titan and the controls -- british lenders 5.7 billion pounds but in them as a buffer. --'s get back to turner remained the u.k. regulator before its volition. gilbert is still with us. what do you make of regulation now, did do for see at the time that we would still be here? >> i think, and mark carney said it as stepping down as the chairman financial stability board. i think the regulations we put into the global banking system and the shadow banking system has made the global financial system itself considerably safer than 2008. i think we are much less likely to see something occurring within the guts of the financial

5:33 am

system. what worries me is not, the financial system itself, but the indebtedness of the economy because although we made the financial system itself better ,apitalized and more resilient if you look at the total amount of debt across the world, public and private together, emerging markets and developed markets as a percent of gdp, it is higher than it has ever been. to me, that is the fundamental vulnerability of the global economy even though i think financial crises themselves like september 20th 2008 are less likely. francine: are you worried there has been a massive overhaul that led to massive deleveraging by the banks which means a lot of the assets are in the less controlled or less monitored price indices? a shift awaywas from the banks. part of that is a good thing. if you move away from bank finance to capital market a straightforward,

5:34 am

transparent form, single name corporate issuing a corporate bond, which is held by long-term investors in print bonds, that i think is probably a better form of credit intermediation than some leveraged risky bank finance. on the whole, the growth of non-bank finance has primarily .een in that form not in some countries. if you look at the chinese expansion of the shadow banking system, that has been astronomical and they are trying to get a grip on it. on the whole across the rest of the world, we have not seen the reemergence of the very risky forms of shadow banking and complex structures and instruments which we saw proliferating before 2008. francine: john? jon: i think the right regulation has made banking safer. simpler, but it was definitely necessary. to your other point about the global interest rate, the global debt ordinance, it's the reason

5:35 am

you fear interest rate rises more than you did historically. there is more debt out there. actually, the concern of the central bank about letting rates go up should be more than it was and is. it's another pressure that keeps rates down. the fear of what happens when they rise should be great. union ispital market dwarfed by bank lending and europe is not really attacking .he nonperforming loan issue there are noises about this and signs that maybe some sales are going up. i don't know if jon has looked at buying any of these. francine: you are not touching them? jon: they are hard to buy because they are held on the books of some institution which is telling the regulator they are worth 90 and you are prepared to offer 20. >> that is exactly the issue europe still faces. and cheating is

5:36 am

still highly prevalent in banks in europe. francine: what does brexit mean her regulation in the u.k. and europe? >> i think pmi would be free from the directives. on the other hand, it would still be bound, obviously, by the international commitments made through the basil committee . i would not anticipate that there will be any major change in the regulation for banks or insurance companies. some of the things they do in terms of intense supervision is by something imposed on them europe, it is something they have chosen to do themselves. anybody who is hankering that we will get out of brexit or do brexit and then have a major regulation, i think that is

5:37 am

relatively unlikely. >> it may be unlikely, but some of it is desirable. some of the regulation is clearly needed. some of the nonsense, there are hundreds of pages and method and wouldy vanish, nobody notice. this is something where the cost-benefit analysis that the one government share -- quarter no benefits and the european version of the cost-benefit analysis, the only numbers in the down document are the page numbers. >> i like other people who are involved in the regulation after 2008 really hanker on the banking side for a huge certification, which would be still higher capital ratios, but much less detailed supervision. ideal capital ratio -- the banana -- benevolent dictator who did not worry about transition would probably be something about you have to have a 20% equity ratio. as long as you are above 50%, we

5:38 am

won't do much and 15% will nationalize you without compensation. and it would be right. francine: what if the u.s. doesn't sign up to that? >> that is a problem and that is why. that's why i said if i was a benevolent dictator in a greenfield economy. you are sitting around the table with your colleagues around the world with different points of view it all you can do is an incremental develop and from where we start with. you don't get the option of designing it exactly as you would like. it still worthwhile knowing what would be your aim if you had that privilege. jon: the problem is all the increments are being complexity. than the only thing worse too little capital is too much capital and the regulation that has been scrapped on to boosting the capital of banks is clearly a hindrance to them. doing what they should do, which is to serve the real economy.

5:39 am

needs to be thought about maybe more sensibly, but it is hard to roll back that time. even 10 years after the crisis, it is hard to see a situation where regulators say those extra 20 pages, we don't need that. hammer, everything looks like a nail and regulators are in building, not shrinking back. we will have plenty more on regulation worldwide and touch on oil and some of what the fed is looking that. andmoulton, adair turner, mark gilbert all stay with us. coming up later today, to name to bloomberg at 80 5 p.m. where alix steel, carol massar, and matt miller will cohost the fireworks spectacular. i know jon moulton will tune in. live from -- this is bloomberg. ♪

5:40 am

5:41 am

5:42 am

francine: "bloomberg surveillance this is "bloomberg surveillance." we are getting breaking, this is --loomberg scoop saying that a pharmaceutical company in germany that mainly does a lot of generics, the chief executive, we understand is set to depart ahead of a likely renewed 5 billion year buyout yield. this is bloomberg news hitting the phones and getting people familiar with the matter giving us that scoop. we will check up on the share price -- if you look at stada gaining around 3%. a very comment on the role-play of private equity in this. are we going to see private equity perms -- firms come into this space? love the area.

5:43 am

they are stable cash flow's was pretty good profitability. short-term, you can always jacked up your profit by jacking the prices up. are actuallyies sitting on nearly $1 trillion of unspent money at the moment. it's the biggest number ever, absolutely immense. the pressure on these large funds to do deals is very high and their investors are seeking much lower rates of return than they were. actually bump into institutions now saying we would be happy with 5% or 6%. used to be 30%. francine: how expectations changed. we will get back to that, now let's focus on the fed. a big week of data continues tomorrow with the release of the smc minutes. despite a series of underwhelming inflation reports, the central bank is expected to

5:44 am

begin unwinding q he as early as september. in europe, the ecb is deciding -- but thisaper chief has reiterated his opposition to the policy, saying it is justified for now, but should not be kept in place too much. let's get back to adair turner, jon moulton, and mark gilbert. there's a lot of talk on the markets about a kind of central pack, but the fact that hawkish undertone was somehow coordinated amongst central banks. is it nonsense? mark: i don't buy that at all. i think the global economic pattern has improved so as you would expect, central banks are starting to talk about how they are going to unwind, what emergency measures. at the same time, this is talk. it is preparing the ground, it is not ready to move. they are worried about taper tantrum's because of what happened when the fed first moved. the market has gotten used to the idea slowly.

5:45 am

i think the ecb in september is probably going to say something. it is not ready to move yet. i think for the bank of england, it is probably in the same game trying to get a two-market. it is probably trying to do the theory that you can talk your way to the goal by going straight to gold rather than -- they swerving tightening we have seen in yields is probably welcomed by the bank of england, but i don't think either the ecb or the bank of england is actually ready to move yet. , it could still move on communication. are the central banks over communicating? i don't know. i think we are in a world where the markets hang on every little suggestion a central bank governor or chief economist makes and i don't think we are going to get out of that. i think that communication out of the bank of england has been a bit strange over the last few

5:46 am

weeks with mark carney saying and then coming back the other way. i suspect they feel the had -- that has been a bit more turbulence than they like. they like does co-way expectations, but it is probably a little more turbulent than they like. if you step back to the structural situation, let's be clear what the ecb is now debating. the ecb is not debating, at the moment, a tightening of policy. it is debating whether or not it will have a slight loosening of a very loose policy, whether it will -- at some stage in the future, reduce the pace it is .ontinuing to exercise qe what that tells you is although there has been a significant uptick in the european economy, it is still somewhat unbalanced, driven by external demand. it is completely different than the u.k. economy.

5:47 am

over the last five or six years, it has been very strong. surprisingly strong performance of this amazing german export modal -- motor. what are -- the rest of it is getting better. trend of growth is so much better than the u.s.. i know it comes from a very low base, but as a region, it is doing much better. now asey describe it performing moderately. by comparison with history, it's actually still quite poor, no reason to get enthusiastic about it. francine: you believe this franco german access can actually change? they were talking about structural reforms, are we going to be in a stronger place in four years? jon: i don't know. i really don't know. there are too many moving parts per any intelligent person to give you a proper answer. francine: we also talked about foreign policy and everything seems to be unchartered territory. >> e.u. reform i think is

5:48 am

something they could achieve. gotten acameron had few more concessions, jon moulton might not have been -- in favor of brexit. the e.u. needs reform and maybe macron with merkel is the combination that will finally bring reforms to the e.u. francine: if you are enjoying this watching at home or on the bloomberg terminal, we hope you are using the tv function and if you are enjoying this conversation as much as i am, you pick up your tv function and say they have jon moulton, they have adair turner, even mark gilbert, i would ask them a question myself. go to the bottom of the video screen and you can see it says "ask the guests a question." they come to me and we will do that shortly. this is bloomberg. ♪

5:49 am

5:50 am

5:51 am

♪ emma: this is "bloomberg surveillance." in the u.k., payment protesting company world pay ford after they received preliminary approaches from jpmorgan advantage. it's not certain and order will be made. willgan advantage -- and

5:52 am

decide if they will bid on world pay. the largest bank set the price of its $8 billion capital raising. they say they need to shore up their balance sheet after acquiring another company. preserve their name in luxury auto sales. for cities sold 32 -- mercedes sold 32 more than bmw. francine: donald trump turned up the heat on beijing after north korea's latest missile launch. they successfully fired an intercontinental ballistic missile ringing it closer to building a device capable of hitting the u.s. with a nuclear warhead. president trump responded by tweeting "perhaps china will put a heavy move on north korea and

5:53 am

end this nonsense once and for all." all of this comes ahead of this week's g-20 summit. let's get back to adair turner, jon moulton, and mark at -- mark gilbert. what would you do if you were china? q get aggravated by president trump's tweets or do you step in and try to mediate? jon: i think ability is aggravated by president trump's tweets. he hates your species and quite a lot of other species and that is clear. saying is deadly serious. here we are talking about a very unstable regime who are now getting incredibly close to having weapons of very serious capability, even a not very well -- explosivelusive bomb anywhere in the united states is a bigger -- event you would hope not to see.

5:54 am

i think someone can take out north korean capability and the choices are china or the united states and i don't think that can be long deferred. ,hat process is extremely risky but less risky than the process of just letting this carry-on. i wish there was a better solution. this is not an economic or business problem, it is a serious threat. >> presumably it is not as much of a risk if china and the u.s. move together to do this. hopefully hits maybe his -- maybe his tweets is an optimistic and good thing for -- jon: i cannot get my head around using tweets to get the chinese to do things. francine: and this is the thing, maybe you need to speak to chinese authorities differently. rarely agree with anything donald trump says. the way to get china to move is certainly not to issue a tweet

5:55 am

in the middle of the night. a hugely difficult problem. ideally, someone with a military sort ofty would just destroy these nuclear plans and capabilities. unfortunately, they cannot do it fast enough to stop the north koreans opening up with a conventional artillery barrage on seal -- on seoul. that is the problem which holds people back from the military solution. it's all very well to say we will do it and if you do it instantaneously. i think it has to be sensible diplomacy, not tweet this policy -- diplomacy. they have got to use every means possible to put the pressure on this man, including, if necessary, covert means of

5:56 am

taking him out and trying to get a change of leadership. this isn't just -- this is a hugely important and difficult issue where there are no easy solutions, but china is absolutely central to it. francine: of course we have the g-20 for him, so maybe something will be discussed then. also worth noting that vladimir putin will meet with -- today. turner, mark gilbert, and jon moulton, thank you. coming up next, we will talk to terry leahy, the former tesla ceo. i am also quite instant to hear him talk about amazon and whether this is a rival and whether they are trying to buy anything here in the u.k. this is bloomberg. ♪

5:57 am

5:58 am

mark: this is bloomberg "real yield." leverage has been building up of the last year or so.

5:59 am

♪ p'sncine: from's -- trum

6:00 am

challenge to china as north korea launches a nuclear missile. intercontinental ballistic missile. share to solution, the u.k. chancellor urges business leaders to help the government make the case for a smooth brexit. good morning everyone and happy fourth of july to our american viewers. i am francine lacqua in london and tom keene is manning the barbecue. he is off this morning. north korea may now be one step closer towards its goal of building a missile with a nuclear warhead second hit the u.s.. the regime claims for the first time it successfully launched an intercontinental ballistic missile. he u.s., south korea, and japan have yet to confirm that. thatdent trump pleaded perhaps china would "put a heavy move on north korea and end this nonsense once and for all."

6:01 am

vladimir putin is meeting with china's president. the two countries have been training -- strengthening their economic ties. trade between russia and china rose 33% of first five months of the year. in the u.k., the chancellor says -- must holdt much its nerve and keep public spending under control. one minister told parliament and unpopular pay freeze is now under active discussion. in sweden, inflation prompted the central bank to remove the potential for another interest rate cut. they see rates at the current level until the middle of next year. the bank said inflation in sweden has been higher than expected. global news 24 hours a day, powered by more 2700 journalists and analysts in more than 120 countries. i am emma chandra. this is bloomberg. rateine: we have had

6:02 am

decisions out of australia and sweden today. let's quickly get onto your market checks. this is what we are seeing overall. a little bit of geopolitics. it u.s. markets are closed because of independence day celebrations. havens advancing on the missile test. this is a clear move, that it is also very thin trading volumes. you can see under 13 gold up 0.3%. sweden, australia down under the rpa kept it benchmark interest rate unchanged. with 1.5% as it waits to see if wages respond to a burst of hiring. the risk bank also holding tight and removing the easing bias, making a hawkish shift. jon moulton is still with us and bloomberg at-bat -- gadfly columnist, mark gilbert. it is a little bit of noise that every thing has to normalize even if it is

6:03 am

not now. how do you measure economic strength? we are looking at the g-20. what kind of data points you look at to convince yourself or your readers that growth is back on track? jon: pmi has been a good indicator for europe and the u.s.. they have shown clear strength. in the u.k., not so much. we have services pmi out tomorrow. with manufacturing pmi yesterday , services look like they are at risk. brexit is causing uncertainty. in the eurozone, clearly things are on an upturn. i think pmi was at a six-year high in the hope for fiscal adjustment may be in the eurozone going forward. i think on a relative basis, the e.u. is winning, the u.k., not so much. markets: are the sophisticated enough to understand these nuances or are

6:04 am

they still buy an area -- binary? the end ofd a -- at the day they are always binary, buy or sell. i think europe is getting better. it seems to be priced into a lot of things at the moment. francine: what is the main risk you see out there? jon: geopolitics and this north korean missile is a very serious development and there is going to be undoubtedly, at some point, a very serious countermeasure which might be very bloody. that is something not at all to be comparable about. i'm not sure it would make that much difference to markets. francine: i was going to say, it looks like markets have largely put their blinkers on when it has come to geopolitics. we are seeing a little bit of impact, but it is because the trading volumes are so thin. hattie look at geopolitics rest

6:05 am

-- how do you look at geopolitics risks? biggest effect to the markets will be the change for policy going forward. if you don't see wage growth coming through for the average consumer and real interest rates start to rise in an environment when the recovery really hasn't taken a firm hold, the charter trade is interesting. we have had a dip down which has not coincided with inflation, which seems to be a rare event. it is it -- is it a good thing we didn't have a recherche and -- recession or is it worrying that the traded dipped without recession. i think the rise of inter-globalization is a risk for markets. if countries become more protectionist, then that will be a risk to the global economy. does followp

6:06 am

through on the protectionist agenda, but that seems less likely. he doesn't seem to actually be able to get anything done, which is a blessing. north korea is, i am afraid, and economic midget. it doesn't really matter for markets. it is not as if it is china deciding to launch attacks on the usa, which clearly had spectacular effects on the economy of the world. to besomething that has dealt with shortly or it will have economic effects. if they do actually ever launch an attack on the united states, it would be horrendos. francine: when you say it seems the president cannot get anything much done, is it going to be a big disappointed to a lot of ceos that were believing in the tax reform in a for structure spending and of it doesn't come through, what is it mean for the u.s. economy? jon: i think if he does very little, that is probably the best outcome for the u.s. economy. it is generally the best thing

6:07 am

for politicians to do that just donk -- just can't seem to it. health care is an area he is having an impact and that is a meaningful thing in the u.s. economy and is affecting quite a lot of companies severely. terms of reflation trade, i think those expectations are gone. francine: even for tax reform? mark: largely. jon: he isn't going to get an enormous amount through. he doesn't have the money tree he needs to have to deliver his program. francine: then he will -- you look at the markets and there is trading on this animal spirit. if ceos cannot believe in it, but the market is believing in it, what needs to happen for a correction to take place? mark: you don't need the trump reflation trade to be true for markets to continue to gain in this environment. i think the basic economic outlook is there to do it alone. jon: markets are not expensive on many measures and not cheap on many either.

6:08 am

they are -- i don't think there is anything really very much strength -- strong there. francine: do you worry about china? jon: i don't understand enough about it to really worry about it. it is a complex economy that produces tough numbers. francine: that we should worry about it in certain aspects? you have the holy trinity which you have to stabilize all three at once. >> they are maintaining 6% or 7% growth going forward. recognitionre is a that something needs to happen. i am with jon, you don't know what is really happening in the chinese economy and you can't really trust the statistics and data that comes up from that and the rest of the world has enough to worry about and enough to focus on and enough to chew over markets have a better outlook for the global economy. even if central banks are moving

6:09 am

away from -- interest rates remain incredibly low. that might be bad for the zombie companies being kept alive, but generally, 3% yield beats 1.5% yield. jon: you get some inflation with the equity's so you can talk yourself on being very bullish on equities. francine: jon moulton, always a pleasure to speak to you and bloomberg gadfly columnist, mark gilbert. we are getting breaking news that the south korean president saying he will seek cooperation of the chinese president to urge -- to tryarticipate and mediate. we will have plenty more on that. russia saying the north korean missile was not seen as a threat, that south korea's president is now trying to meet with vladimir putin on july 7.

6:10 am

we will have more on the geopolitics certainly filtering through the markets. we are seeing a selloff in risky assets deepening. this is bloomberg. ♪

6:11 am

6:12 am

♪ emma: this is "bloomberg surveillance." let's get to the bloomberg business flash. microsoft is reorganizing sales and marketing operations. that will mean thousands of job cuts in areas such as field sales. microsoft wants to attract more customers to cloud computing an artificial intelligence services and the need sales staff with more technical and industry expertise. soon you may be able to unlock your iphone using your face instead of a fingerprint. apple is testing an improved

6:13 am

security system that lets users log in, authenticate payments, and launch secure apps by scanning their faces. the feature is set to be part of a redesigned iphone to do -- to be out later this year. rupert murdoch is at a crossroads as he plots its net -- his next move for the bit of sky. the cochairman can offer more concessions or hope the bid will make it through the six-month regulatory review. the british government already rejected his proposal. that is the bloomberg business flash. tomorrow we will get clues into the fed's recent thinking on monetary policy with minutes from the latest meeting when they voted to raise rates. we also get a gauge of the strength of the u.s. economy with the jobs report and how analysts are expecting the jobless rate to remain at a 16-year low. alberto gallo joins us now.

6:14 am

last week we went from -- the when they seest the data or do they go by what the central bank has been saying, which is we will raise when the markets expect us to? alberto: at the beginning of the year after the trump election everyone was playing the reflation trade. a lot of people got hurt. we think markets now are a bit complacent about a return on this trade because everyone got hurt by dovishness in the middle of the year in the middle of between q1 and q2. we are close to full employment and starting to see wages pickup and the fed may look through the slight decline in oil we have seen. as we have seen with the draghi speech last week, when central bankers hint at hawkishness, if the market is unprepared, you can have big moves. we could see the same moves

6:15 am

continuing in the treasury market after we have seen them in one's -- bunds this week and last week. francine: the concern with the u.s. is janet yellen tells us at some point the labor market is so strong it will filter through inflation. at the moment there is no wage growth. we are starting to see signs of wage growth. it is not accelerating, but let's remember there are other indicators that show that the labor market is now very constrained. there was a story about slack in the labor market and people that were out of the labor market coming in as the economy recovers. a since the recovery, it has been so long, the people that are out are out for good. now you are potentially facing a bottleneck in the labor market where you have lack of skills in certain sectors and this drives wages higher. we could see wage growth going up. the other reason the fed to be hawkish is they simply want to build a buffer because if the

6:16 am

economy has a cyclical downturn in the next one or two years, they cannot cut rates if they are already at zero. they want to build a buffer for interest rates to cushion a potential downside. francine: what i am hearing from a lot of market participants -- jon moulton and adair turner were saying the biggest risk they see out there are away from geopolitics, the policy mistake and that would be to hike and to kill off -- alberto: everyone in the macro community is worried about the federal reserve hiking too much too soon and then causing a crash. from a central banker greg: -- central banker's perspective, the hike today or do you keep rates low and feed off of bubbles to pop later on and create an even bigger crisis? if you think about what yellen has been saying over the years, remember 10 or 15 years ago, she

6:17 am

was almost recommending -- today, the attention to risk management, to complexity, to capital, liquidity requirements is a lot higher. i think even though they don't have financial stability as a core mandate, they are more aware of the bubbles that can grow as a result of low rate. you -- for our radio listeners, it is a very simple fmo see dot plot. how much does this assume that tax reform and in will spirit will continue in the united states and will we see -- actually a lot of these dots being changed if president does not deliver by the end of the year? alberto: i think the question is how much can the fed still hike

6:18 am

even if president trump does not deliver? president trump may deliver on a corporate tax cut in our view. it is difficult for the presidency to deliver on tax reform and infrastructure spending. these are very hard things to do. having said that, i still believe that the fed may want to lean towards the dot plot. maybe not exactly as it says, but towards the dot plot and i still think market expectations are a bit complacent being so much away from the dot plot. the reason is, as you get closer monday, do you want to leave the interest rate environment for more buffer for future downturns. there is a probability -- a nonzero probability of a recession in 2018, 2019, or 2020's. it's possible we will have a downturn within the next three or four years. a buffer.o build

6:19 am

currently, we do not have it and -- all the seeing is central banks are trying to do this now. markets are not completely prepared for this. francine: right, -- right, because they may be looking at data points that we hope to become more familiar with this week. coming up, we spoke with the chief economist -- he has a thing or two to say about eurozone and also maybe a little bit of what we are seeing with brexit. that is at 6:00 a.m. in a new york and 11:00 in london. this is bloomberg. ♪

6:20 am

6:21 am

6:22 am

6:23 am

♪ francine: this is "bloomberg surveillance." i am francine lacqua here in london. tom keene is off this week enjoying his july the fourth holiday. let's focus on oil. a brent crude is low today after the longest rally since 2012. data compiled shows opec's june output was the highest this year in libya and nigeria are ramping up production. joining us is will kennedy, bloomberg's managing editor for energy and commodities in bloomberg. and still with us is alberto gallo. great to have you on the program. what does it mean for compliance? compliance opec production cuts are in place and they complied and everyone was surprised and you have extra barrels from people who were not under the accord. yeare deal struck last specifically excluded nigeria and libya because it was recovering from the war and

6:24 am

production was much lower than it would be a nigeria because it was afflicted by violence in the delta. what we have seen since as both of those countries made considerable progress bringing production back. libya is now above one million barrels a day, which has added several hundred barrels to production and negates a lot of the work opec has done in other countries. that is the problem. francine: was it mean for stockpiles? when are we going to see stockpiles that resemble something more normal? will: we have had a good recovery the last week. the story of june was still pretty bleak. prices fell in june, which is -- they were expected to rise as people in the northern holiday go on holiday and stop driving. we haven't really seen the stockpiles fall in any meaningful way yet. until that happens, i don't think people will have any confidence that opec is getting any traction in the market. francine: how does it move on to

6:25 am

your world, alberta? o? alberto: oil is a risk for markets. obviously there is a deflation risk, but there's a lot of assets linked to oil. now think about emerging markets, credit, high-yield bonds in the u.s. and the risk that all those below $40 is substantial given that valuations are so tight, we think there is a strong risk because the structural nature of the opec economy is changing. there is more supply of oil in the world due to shale and production in the u.s. and there a difficulty for these governments to maintain political order at home. if you are faced with social unrest like venezuela and trying to convert your kingdom into a democratic economy like saudi arabia and you are going to have a very long path of structural adjustment, not four years. it is a 10-20 year issue and you

6:26 am

are going to have to pump more oil if things do not work. francine: it becomes a lot more toficult as an economist look at how you measure the price of oil given everything that is -- has come online out of the u.s. thank you so much, will kennedy and alberto gallo. coming up next, we speak retail, inflation here in the u k, a little bit about brexit, and we also speak about amazon. we speak to terrell -- terry leahy. i am looking forward to this info. -- interview. we also look at a lot of your markets, little bit of a risk haven. this is bloomberg. ♪

6:27 am

6:28 am

whoooo. you're searching for something. like the perfect deal... ...on the perfect hotel. so wouldn't it be perfect if there was a single site where you could find the right hotel for you at the best price? there is. because tripadvisor now compares prices from over 200 booking sites... ...to save you up to 30%...

6:29 am

...on the hotel you want. trust this bird's words. tripadvisor. the latest reviews. the lowest prices. ♪ this is "bloomberg surveillance." i am francine lacqua in london. happy fourth of july to all of our american viewers and listeners.

6:30 am

i will try to describe it as much as i can. this is the jefferson memorial in washington, d.c. a beautiful, clear sky over the west parts of the u.s. i imagine a lot of barbecues today. tom keene probably trying to take a handle with how to it best over in new york and let's get to bloomberg first word news. >> for a long time north korea has threatened to develop a missile that could threaten the u.s. with a nuclear weapon. for the first time north korea has launched an icbm. it kluber over 500 miles for landing in the sea of japan. president trump hoping china will end this nonsense once and for all. the state of hawaii is

6:31 am

challenging the government's enforcement of president trump's travel ban. meanwhile, a federal appeals court says epa can suspend and obama era -- cannot suspend an emmission rule. in venezuela, the opposition alliance will hold an unofficial for ao gauge support national unity government. antigovernment protests have been going on for months. meanwhile the president of that country is holding a constitutional convention that critics say will give him more power. in sweden, inflation has caused the central bank to remove the near-term potential for a

6:32 am

central bank rate cut. inflation has been slightly higher than expected. the governor spoke to bloomberg following the decision. >> given our view of the world resume in our case, most likely it will state what until next -- stay put until next summer. that depends quite a lot on what is going on. that depends on the growth numbers being good within the emu. >> global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. i am emma chandra. this is bloomberg. francine: thank you so much. the collapse following the brexit vote has actually helped supermarkets boost sales and profit margins. they grew at their fastest rate in five years the spring. joining us is the former ceo of tesco.

6:33 am

bnm advisor. thank you for joining us. when did supermarkets get over complicated? it seems like a lot of the supermarkets worldwide are trying to streamline their processes. why did we think bigger was better with more things to buy? >> in one sense, eger is better for retail. i think they faced a perfect storm. you had the recession right at the time we were seeing disruption from digital innovation and discounters. i think perhaps the supermarket 2013try from 2012 and onwards made some wrong steps. they concentrated too much on owlove promotions -- high-l

6:34 am

promotions. they needed to focus on straightforward, reliable, every day prices. they are now beginning to do that. it has been a painful process. you can see them stabilizing in that position. francine: how will a change in the next five to 10 years? will we see a lot less competition because of the discounters and they will be forced to merge? >> it is difficult to read. it depends on the consumer, the ultimate arbiter of who wins and loses and whether they have got money to spend or not. assuming the economy is going on basically ok and gradual growth in consumer expenditure, and it is a battle between traditional supermarkets and how they can respond to the threat of discounters and online specialist, and whether they can

6:35 am

stay relevant for consumers. originald the challenge of the digital online startups. now they may be learning from them and beginning to take on some of the digital capability that allows them to compete in multiple channels, direct to home online, and also in store. francine: we will be talking about competition, especially from amazon in the u.s. that is an argument saying the pound declining and inflation going up, as a supermarket you could reprice, and your margins could be higher. it is a difficult balance because if you hike too much, people may choose another supermarket. >> it is a goldilocks dilemma. francine: first of all, how do you think of pricing? >> you do not think of inflation. it happened because of brexit

6:36 am

and the pound's collapse one year ago. through going to push inflationary increases. there was a spat between tesco and unilever about how much was justified or not, you may remember. i think we may be through the worst of it a year on. much of the costs were taken the first half of the year. there will be some more to come because of hedging and things like that. so far it has remained at the level that the consumers can just about live with, and that toallowed the supermarkets hold volume. that is why you're seeing a little bit of that nominal growth. francine: we have a global audience. when you are ceo tesco, what was your main concern?

6:37 am

were you worried about the isles, how things were price, how things were put in the mores, or was it international strategy? >> every retailer is into the details. francine: does it really matter so much whether it is on aisle 5 or 10? >> it does. you want to know whether you are relevant to not. the job of the ceo is to keep your brand and business development relevant to the consumer. you have got to try to read where they are going and do useful things for them, make their life a little easier. that is all in the details. at the same time, there were big challenges, it's all revolution happening, -- digital revolution happening. those were the sorts of strategic challenges of that

6:38 am

time. francine: a lot of u.k. supermarkets seem to be scrambling for partnerships, buying companies, is this the right approach? should they regroup on their core businesses? >> this is interesting. i think there was a necessary 2013 where 2012 to they needed to slow down, refocus, and rebuild their prices and restore faith in their prices with consumers. i think they made a little progress in that. that is good. what is next? how can we start to grow forward? i think some of these moves like tesco and others are showing a sign of returning confidence. that is not a bad thing. francine: overseas expansion has gone into reverse. is that the right thing to do? >> ideally if a business is strong at home, they can continue to expand overseas. retailing is one of the harder

6:39 am

industries to operate on a global basis. tastes are local. some of these companies have faced difficulties in their home market. it may restart again. interestingly, e-commerce is easier to internationalize than traditional bricks and mortar network. you may see more of it in the next generation. francine: when you see aldi expanding in the u.s., are there any things with hindsight you would do different in the u.s.? how do you capture that market? >> timing could have been better. we opened fresh and easy in 2007, rifle the housing crisis started in the u.s.. we were opening in places like southern california, arizona, the epicenter of that housing downturn. actually, fresh and easy itself was popular with consumers.

6:40 am

they loved it. it was one of the most accessible formats we ever developed. after i left, because of problems at home, they felt they could not sustain that growth. it is a long-term commitment. aldi has been there a couple of decades. they are prepared to make long-term bets. francine: thank you so much. the former ceo of tesco stays with us. we will be talking about amazon and possible consolidation worldwide. tune in tonight to bloomberg popsfor the boston fireworks spectacular. this is bloomberg. ♪

6:41 am

6:42 am

♪

6:43 am

francine: this is "bloomberg surveillance." i am francine lacqua. happy fourth of july. tom keene is off today. says china will improve its valuation. they promise to continue financial reform. will continueina its prudent monetary policy, there has been some discussion of whether there was too much intervention. but they are sending a clear message that it is safe for the moment, and they will improve what they are doing. let's get to the bloomberg business flash. taking overder says the italian bank will only have a minimal impact on earnings. santander says it needs to shore up its balance sheet after

6:44 am

acquiring banco popular. mercedes sold a record 29,000 cars and light trucks in the u.s. in june, just 32 more than bmw, which lost the sales battle five of the last six months. causeds computer systems disruptions within trading monday. third-party providers showed wild moves in companies like google, apple, and microsoft that never happened. they are working to resolve that problem. francine: thank you so much. retailers are feeling the pressure from the growth of amazon, the online giant. -- r with terry leahy,

6:45 am

the former ceo of tesco. what do you make of the day amazon bought whole foods? was this expected and a good move? terry: i don't know that it was expected, by me at any rate. it was a good move. it shows amazon is more serious about developing a food business. they have been around it for a while. 2007, fresh started in and they have experimented with other formats as well. this is clearly a large step into major commitment. our guess is it will mainly be focused in the u.s. in the early stages. it is interesting. the u.s. is a relatively small online food business. in the u.k., it is quite well developed.

6:46 am

online sector that explains why there is such a large e-commerce share within the u.k. overall. with deliveryne seems to be more expensive than the traditional bricks and mortar. will this ever change? food, it the u.k. with is the same price. francine: is it? terry: i think retailers have chosen felt they need to be the same price. you do pay for a charge. in terms of operations, is it more expensive to pay for a supermarket versus having people come to you? terry: they used to say the biggest increase in western economies were self-service stores. there is a cost there. retailers have improved productivity. they do have the delivery charge that helps defray the cost.

6:47 am

the better of them now feel indifferent as to whether it is one pound online or in the store. there are steps in robotics and improved automation that will very much improve the productivity, whether it is in a great central warehouse or in the back of the local store. francine: the main factor that will change robotic warehouses, is that the game changer in the next five years, or is it the threat of amazon? terry: it is all of that. francine: what would were you the most? most?ry you the terry: i don't think that is the right attitude. retailers have had plenty of opportunity to see that coming, and to learn from that. the businesses going forward

6:48 am

will be multi channel businesses. they will be as competitive online as they are in traditional bricks and mortar. they will probably have to write size their bricks and mortar network, perhaps more in the u.s. because there is more fiscal space per head of population than there is in the u.k. or europe. the important thing is if a retailer is going to have a future, they will have to deliver every channel. francine: will amazon by something in the u.k. or europe to replicate? should it by something? terry: it is hard to know. it depends on how they see their way forward with food. i expect they will take a little time to absorb whole foods, which is their first big physical bricks and mortar network. they are fast learners.

6:49 am

they will want to grow in that space. they may make an acquisition in europe as part of that. francine: thank you so much. terry leahy, the former ceo of tesco stays with us. you can follow us on tv . go on to your interactive tv, click on this, and you can see our pool charts, listen to what terry was saying. it is july 4. you can also get a question. we will talk more about inflation and retailers. this is bloomberg. ♪

6:50 am

6:51 am

6:52 am

♪ francine: this is "bloomberg surveillance." i am francine lacqua in london. tom keene is off. americany 4 to our viewers. concerns that the city of london could move hundreds of millions in accounting and legal fees. something of a rebound in the first half of the year. terry leahy, former ceo of tesco, and also the chairman of and an advisor to a

6:53 am

private equity firm. thank you so much for sticking around and giving us a little of your time. what is it like being involved in private equity? do you just spot trends? terry: i am fully involved. it is a great find. -- fund. you work as a team, working out investment ideas, identify companies, try to buy them in competition with others, and improve the business value and sell the business. it is. business. pure great fun -- it is business. it is great fun. i am learning a lot. there is a real discipline. you have to pay the right price. you only have a limited amount of time. what are you looking at at the moment? i know you will not tell us. what are the important trends on where you can find value? terry: finding value at the

6:54 am

moment is difficult. if you don't want to pay to much, you will have to sit on the sidelines a few times. you have to be patient. the main thing is to be a little contrary and and looking places -- a little contrarian and look in places like digital disruption. we have invested well there. francine: what kind of retailers? terry: we like discounts. bnm stores has been a great investment. convenience is a very good space. we have invested in travel conveniencea format. like a lot of people, we would like to invest in something more health-related. that is tough to do. either literally health foods or providing health services, and

6:55 am

like dental chance have been have been-- chains very good investments. e-commerce.ted in the valuations are very different. francine: do you ever worry about bubbles? terry: yeah. i do. i think it is important to try to get the e-commerce business through to making money, cash flow, to prove the business model. there is a danger if you consume too much cash for too long, you never really prove that the kind of business you are undertaking will make a sustainable return. francine: in 10 years, will there only be 70% of the retailers we have in the u k or even fewer? terry: there has always been a casualty rate in retail because

6:56 am

it is highly contested as an industry. customers have always had a wide array of choice. it is now on hyperspeed because of digital innovation and globalization. is the ones who survive will probably be stronger and may even be more profitable because of the internet of things, digital data, all of these things actually help the bottom line. francine: thank you so much. terry leahy, former tesco ceo. you can see thin trading because of july 4. havens advancing. this is bloomberg. ♪

6:57 am

6:58 am

whoooo. you're searching for something. like the perfect deal... ...on the perfect hotel. so wouldn't it be perfect if there was a single site where you could find the right hotel for you at the best price? there is. because tripadvisor now compares prices from over 200 booking sites... ...to save you up to 30%...

6:59 am

...on the hotel you want. trust this bird's words. tripadvisor. the latest reviews. the lowest prices. ♪ >> end this nonsense, donald

7:00 am

trump's challenge to china as north korea successfully launches in intercontinental listed missile. its neutral stance bank -- 's central searching for a shared solution. the u.k. chancellor helps to urge u.k. politicians to slot and easier brexit. p.m. in hong kong. welcome to bloomberg markets. let's get a check of the first word news. >> thank you. north korea may be one step closer to its goals of building a nuclear missile capable of hitting the u.s.